ENCORE WIRE CORPORATION Introduction
The following management's discussion and analysis is intended to provide a better understanding of key factors, drivers and risks regarding the Company and the building wire industry. The duration and severity of the COVID-19, and any ongoing variants, pandemic outbreak and their long-term impact on our business are uncertain at this time. Developments surrounding the COVID-19 global pandemic are continuing to change daily, and we have limited visibility into the extent to which market demand for our products as well as sector manufacturing and distribution capacity will be impacted.
Executive Overview
Encore Wire sells a commodity product in a highly competitive market. Management believes that the historical strength of the Company's growth and earnings is in large part attributable to the following main factors:
•industry-leading order fill rates and responsive customer service;
•product innovations and product line expansions based on listening to and understanding customer needs and market trends;
•low cost manufacturing operations, resulting from a state-of-the-art manufacturing complex;
•low distribution and freight costs due in large part to the "one campus" business model;
•a focused management team leading a skilled work force;
•low general and administrative overhead costs; and
•a team of experienced independent manufacturers' representatives with strong
customer relationships across
These factors, and others, have allowedEncore Wire to grow from a startup in 1989 to what management believes is one of the largest electric building wire companies inthe United States of America . Encore has built a loyal following of customers throughoutthe United States . These customers have developed a brand preference forEncore Wire in a commodity product line due to the reasons noted above, among others. The Company prides itself on striving to grow sales by expanding its product offerings where profit margins are acceptable. Senior management monitors gross margins daily, frequently extending down to the individual order level. Management strongly believes that this "hands-on" focused approach to the building wire business has been an important factor in the Company's success, and will lead to continued success. The construction and remodeling industries drive demand for building wire. In 2021, unit sales increased 10.8% in copper wire versus 2020. In 2020, unit sales decreased 5.4% in copper wire versus 2019. In 2019, unit sales increased 4.1% versus 2018. General The Company's operating results are driven by several key factors, including the volume of product produced and shipped, the cost of copper and other raw materials, the competitive pricing environment in the wire industry and the resulting influence on gross margins and the efficiency with which the Company's plants operate during the period, among others. Price competition for electrical wire and cable is significant, and the Company sells its products in accordance with prevailing market prices. Copper, a commodity product, is the principal raw material used by the Company in manufacturing its products. The price of copper fluctuates, depending on general economic conditions and in relation to supply and demand and other factors, which causes monthly variations in the cost of copper purchased by the Company. Additionally, theSEC allows shares of physically backed copper exchange traded funds ("ETFs") to be listed and publicly traded. Such funds and other copper ETFs like it hold copper cathode as collateral against their shares. The acquisition of copper cathode by Copper ETFs may materially decrease or interrupt the availability of copper for immediate delivery inthe United States , which could materially increase the Company's cost of copper. In addition to rising copper prices and potential supply shortages, we believe that ETFs and similar copper-backed derivative products could lead to increased price volatility for copper. The Company cannot predict copper prices in the future or the effect of fluctuations in the cost of copper on the Company's future operating results. Wire prices can, and frequently do change on a daily basis. This competitive pricing market for wire does not always mirror changes in copper prices, making margins highly volatile. Historically, the cost of aluminum has been much lower and less volatile than copper. The tables below highlight the range of closing prices of copper on the COMEX exchange for the periods shown. 12 --------------------------------------------------------------------------------
COMEX COPPER CLOSING PRICE 2021
October November December Quarter Ended Year-to-Date
2021 2021 2021 Dec. 31, 2021 Dec. 31, 2021
High $ 4.76 $ 4.46 $ 4.47 $ 4.76 $ 4.78
Low 4.16 4.27 4.18 4.16 3.54
Average 4.45 4.37 4.33 4.38 4.25
COMEX COPPER CLOSING PRICE 2020
October November December Quarter Ended Year-to-Date
2020 2020 2020 Dec. 31, 2020 Dec. 31, 2020
High $ 3.19 $ 3.42 $ 3.63 $ 3.63 $ 3.63
Low 2.86 3.07 3.47 2.86 2.12
Average 3.06 3.20 3.53 3.27 2.80
COMEX COPPER CLOSING PRICE 2019
October November December Quarter Ended Year-to-Date
2019 2019 2019 Dec. 31, 2019 Dec. 31, 2019
High $ 2.68 $ 2.72 $ 2.86 $ 2.86 $ 2.98
Low 2.55 2.62 2.61 2.55 2.51
Average 2.61 2.65 2.77 2.68 2.72
COMEX COPPER CLOSING PRICE 2021 by Quarter
Quarter Ended Quarter Ended Quarter Ended Quarter Ended Year-to-Date
March 31, 2021 June 30, 2021 Sept. 30, 2021 Dec. 31, 2021 Dec. 31, 2021
High $4.30 $4.78 $4.59 $4.76 $4.78
Low 3.54 4.00 4.04 4.16 3.54
Average 3.87 4.42 4.30 4.38 4.25
COMEX COPPER CLOSING PRICE 2020 by Quarter
Quarter Ended Quarter Ended Quarter Ended Quarter Ended Year-to-Date
March 31, 2020 June 30, 2020 Sept. 30, 2020 Dec. 31, 2020 Dec. 31, 2020
High $2.88 $2.71 $3.11 $3.63 $3.63
Low 2.12 2.19 2.72 2.86 2.12
Average 2.56 2.43 2.93 3.27 2.80
Results of Operations
13--------------------------------------------------------------------------------
The following table presents certain items of income and expense as a percentage of net sales for the periods indicated.
Year Ended December 31,
2021 2020 2019
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold:
Copper 46.7 % 57.3 % 60.8 %
Other raw materials 10.5 % 13.5 % 14.0 %
Depreciation 0.8 % 1.4 % 1.2 %
Labor and overhead 6.6 % 10.8 % 11.0 %
LIFO adjustment 1.9 % 1.8 % - %
Total cost of goods sold 66.5 % 84.8 % 87.0 %
Gross profit 33.5 % 15.2 % 13.0 %
Selling, general and administrative expenses 6.5 % 7.6 % 7.4 %
Operating income 27.0 % 7.6 % 5.6 %
Net interest and other income - % 0.1 % 0.4 %
Income before income taxes 27.0 % 7.7 % 6.0 %
Provision for income taxes 6.1 % 1.8 % 1.4 %
Net income 20.9 % 5.9 % 4.6 %
The following discussions and analyses relate to factors that have affected the
operating results of the Company for the years ended December 31, 2021 , 2020 and
2019. Reference should also be made to the Financial Statements and the related
notes included under "Item 8. Financial Statements and Supplementary Data" of
this Annual Report. Additional information about results for year end 2019 and
certain year-on-year comparisons between 2020 and 2019 can be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2020 .
Net sales for the twelve months ended December 31, 2021 were $2.593 billion
compared to $1.277 billion during the same period in 2020 and $1.275 billion
during the same period in 2019. The 103.0% increase in net sales dollars in 2021
versus 2020 is primarily the result of a 104.7% increase in copper wire sales.
Sales dollars were driven higher by an 84.7% increase in average selling price
of copper wire, coupled with a 10.8% increase in copper wire pounds shipped.
Average selling prices for wire sold were driven higher by rising copper
commodity prices. In the twelve months ended December 31, 2020 versus the twelve
months ended December 31, 2019 , copper unit volume, measured in pounds of copper
contained in the wire sold, decreased 5.4%.
Cost of goods sold was $1.725 billion in 2021 versus $1.082 billion in 2020 and
$1.109 billion in 2019. The increase in 2021 compared to 2020 was driven by an
increase in material costs to support the increase in net sales. The increase in
material cost in 2021 from 2020 reflects a 10.8% increase in copper volume
shipped and a 49.5% increase in the cost of copper purchased. The decrease in
2020 compared to 2019 was mainly driven by a decrease in material costs, and to
a lesser extent, a decrease in labor and overhead costs year-over year. The
decrease in 2020 from 2019 reflects a 5.4% decrease in copper volume shipped,
offset by a 2.6% increase in the cost of copper purchased.
Gross profit percentage for the twelve months ended December 31, 2021 was 33.5%
compared to 15.2% during the same period in 2020 and 13.0% during the same
period in 2019. The average selling price of wire per copper pound sold
increased 84.7% in the twelve months ended December 31, 2021 versus the twelve
months ended December 31, 2020 , while the average cost of copper per pound
purchased increased 49.5%. The average selling price of wire per copper pound
sold increased 4.7% in the twelve months ended December 31, 2020 versus the
twelve months ended December 31, 2019 , while the average cost of copper per
pound purchased increased 2.6%.
Net income for the twelve months ended December 31, 2021 was $541.4 million
versus $76.1 million in the same period in 2020 and $58.12 million in the same
period in 2019. Fully diluted net earnings per common share were $26.22 in the
twelve months ended December 31, 2021 versus $3.68 in the same period in 2020
and $2.77 in the same period in 2019.
14
--------------------------------------------------------------------------------
Inventories consist of the following at
2021 2020 2019
Raw materials $ 54,012 $ 40,842 $ 25,882
Work-in-process 40,422 30,311 25,381
Finished goods 123,401 88,544 83,222
Total 217,835 159,697 134,485
Adjust to LIFO cost (117,019) (67,375) (44,801)
Lower of cost or market adjustment - - -
Inventory $ 100,816 $ 92,322 $ 89,684
The quantity of total copper inventory on hand increased somewhat in 2021,
compared to 2020. The other materials category, which includes a large number of
raw materials, had quantity changes that included increases and decreases in
various other materials. This resulted in a last-in, first-out (LIFO) method
adjustment increasing cost of sales by $49.6 million in 2021. We utilize the
LIFO method because it results in a better matching of costs and revenues.
The quantity of total copper inventory on hand increased somewhat in 2020,
compared to 2019. The other materials category, which includes a large number of
raw materials, had quantity changes that included increases and decreases in
various other materials. This resulted in a LIFO method adjustment increasing
cost of sales by $22.6 million in 2020.
Based on the current copper and other raw material prices, there is no lower of
cost or market (LCM) adjustment necessary in the periods presented above. Future
reductions in the price of copper and other raw materials could require the
Company to record an LCM adjustment against the related inventory balance, which
would result in a negative impact on net income.
Gross profit was
Selling expenses, which are made up of freight and sales commissions, were$109.5 million in 2021,$66.8 million in 2020 and$66.0 million in 2019. Freight costs increased as a result of increased sales volumes and an increase in overall freight rates. Commission costs increased commensurate with the sales dollar increase. As a percentage of net sales, selling expenses were 4.2% in 2021 and 5.2% in both 2020 and 2019. General and administrative expenses were$57.6 million in 2021,$29.5 million in 2020 and$28.5 million in 2019. The increase in 2021 is primarily the result of increased stock-based compensation as a result of a 136% increase in our stock price. As a percentage of net sales, general and administrative expenses were 2.2% in 2021 versus 2.3% in 2020 and 2.2% in 2019. Accounts receivable write-offs were zero in 2021,$0.3 million in 2020 and$0.2 million in 2019. The Company increased the reserve for credit losses by$1.5 million and$0.7 million in 2021 and 2020, respectively, and did not increase the reserve in 2019. Net interest and other income was$0.2 million in 2021,$1.3 million in 2020 and$4.2 million in 2019. The decrease in 2021 and 2020 reflect the economic impact of the pandemic and its effect on interest rates during the year and the resulting interest earned. Our effective tax rate was 22.6% in 2021, 23.0% in 2020 and 23.2% in 2019. The differences between the provisions for income taxes and the income taxes computed using the federal income tax statutory rate are primarily due to state taxes and non-deductible expenses.
As a result of the foregoing factors, the Company's net income was
15
--------------------------------------------------------------------------------Liquidity and Capital Resources
The following table summarizes the Company's cash flow activities (in
thousands):
Year Ended December 31,
2021 2020 2019
Net cash provided by operating activities
(52,456)
Net cash used in financing activities (44,396) (19,313)
(1,105)
Net increase in cash and cash equivalents
$ (1,633) $ (1,650) $ (1,673) The Company maintains a substantial inventory of finished products to satisfy customers' prompt delivery requirements. As is customary in the industry, the Company provides payment terms to most of its customers that exceed terms that it receives from its suppliers. In general, the Company's standard payment terms result in the collection of a significant majority of net sales within approximately 75 days of the date of the invoice. Therefore, the Company's liquidity needs have generally consisted of working capital necessary to finance receivables and inventory. Capital expenditures have historically been necessary to expand and update the production capacity of the Company's manufacturing operations. The Company has historically satisfied its liquidity and capital expenditure needs with cash generated from operations, borrowings under its various debt arrangements and sales of its common stock. We believe that the Company has sufficient liquidity, and will continue to have sufficient liquidity beyond the short-term outlook, and do not believe COVID-19, or any of its ongoing variants, will materially impact our liquidity, but we continue to assess the COVID-19 pandemic and any ongoing variants and their impact on our business, including on our customer base and suppliers.
At
OnFebruary 9, 2021 , the Company terminated its previous credit agreement and entered into a new Credit Agreement (the "2021 Credit Agreement") with two banks,Bank of America, N.A ., as administrative agent and letter of credit issuer, andWells Fargo Bank, National Association , as syndication agent. The 2021 Credit Agreement extends throughFebruary 9, 2026 and provides for maximum borrowings of$200.0 million . At our request and subject to certain conditions, the commitments under the 2021 Credit Agreement may be increased by a maximum of up to$100.0 million as long as existing or new lenders agree to provide such additional commitments. Borrowings under the line of credit bear interest, at the Company's option, at either (1) LIBOR plus a margin that varies from 1.000% to 1.875% depending upon the Leverage Ratio (as defined in the 2021 Credit Agreement), or (2) the base rate (which is the highest of the federal funds rate plus 0.5%, the prime rate, or LIBOR plus 1.0%) plus 0% to 0.375% (depending upon the Leverage Ratio). A commitment fee ranging from 0.20% to 0.325% (depending upon the Leverage Ratio) is payable on the unused line of credit. AtDecember 31, 2021 , there were no borrowings outstanding under the 2021 Credit Agreement, and letters of credit outstanding in the amount of$0.4 million left$199.6 million of credit available under the 2021 Credit Agreement. Obligations under the 2021 Credit Agreement are the only contractual borrowing obligations or commercial borrowing commitments of the Company. The 2021 Credit Agreement contains provisions to replace LIBOR with a replacement rate as described in the 2021 Credit Agreement.
Obligations under the 2021 Credit Agreement are unsecured and contain customary
covenants and events of default. The Company was in compliance with the
covenants as of
The Company paid interest totaling
OnNovember 10, 2006 , the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to an authorized number of shares of its common stock from time to time in the open market or private transactions at the Company's discretion. This authorization originally expired onDecember 31, 2007 , and the Company's Board of Directors has authorized several increases and annual extensions of this stock repurchase program, most recently onNovember 8, 2021 , authorizing the repurchase of up to 1,000,000 shares of our common stock. As ofDecember 31, 2021 , 917,822 shares remained authorized for repurchase throughMarch 31, 2022 . The Company repurchased 475,557 shares of its stock in 2021 and 441,250 shares in 2020. The Company did not repurchase any shares of its stock in 2019. Net cash provided by operations increased$360.9 million to$418.4 million in 2021 compared to$57.5 million in 2020 and$106.1 million in 2019. The increase in cash provided by operations of$360.9 million in 2021 versus 2020 was due to several factors. Net income increased to$541.4 million in 2021 from$76.1 million in 2020. Accounts receivable increased$216.8 million in 2021 compared to increasing$53.4 million in 2020, resulting in a negative impact to cash flow of$163.4 million . Accounts receivable was impacted by the$307.0 million increase in net sales in the fourth quarter of 2021 versus the fourth quarter of 2020, due to a 70.5% increase in the average selling price per pound of copper wire sold, and a 3.9% increase in 16 -------------------------------------------------------------------------------- copper volume shipped. Inventory, net increased$8.5 million in 2021 compared to increasing$2.6 million in 2020, producing a negative impact to cash flow of$5.9 million . Trade accounts payable and accrued liabilities favorably impacted cash by$66.9 million in 2021 versus favorably impacting cash by$7.6 million in 2020, a positive swing of$59.3 million . These changes in cash flow were the primary drivers of the$360.9 million increase in net cash flow provided by operations in 2021 versus 2020. Net cash provided by operations decreased$48.6 million to$57.5 million in 2020 compared to$106.1 million in 2019. The decrease in cash provided by operations of$48.6 million in 2020 versus 2019 was due to several factors. Net income increased to$76.1 million in 2020 from$58.1 million in 2019. Accounts receivable increased in 2020, resulting in cash used of$53.4 million versus cash provided of$12.3 million in 2019, a decrease in operating cash flow of$65.7 million . Accounts receivable was impacted by the$78.5 million increase in net sales in the fourth quarter of 2020 versus the fourth quarter of 2019, brought on by a 21.1% increase in the average selling price per pound of copper wire sold, and a 4.3% increase in copper volume shipped. Changes in inventory resulted in cash used of$2.6 million in 2020 versus cash provided of$12.7 million in 2019, a$15.3 million decrease in cash provided. Changes in trade accounts payable and accrued liabilities resulted in cash provided of$7.6 million in 2020 versus cash provided of$2.0 million in 2019, a positive swing of$5.6 million . These changes in cash flow were the primary drivers of the$48.6 million decrease in net cash flow provided by operations in 2020 versus 2019. Net cash used in investing activities was$118.2 million in 2021 versus$86.0 million in 2020 and$52.5 million in 2019. In 2021 and 2020, capital expenditures were used primarily for the construction of our new service center, the acceleration of spending for our repurposed distribution center, and the purchase and installation of machinery and equipment throughout the Company. In 2019, capital expenditures were used primarily for the purchase and installation of machinery and equipment throughout the Company. The net cash used by financing activities of$44.4 million in 2021 consisted primarily of$43.3 million used to purchase Company stock and dividend payments of$1.6 million , partially offset by$1.1 million proceeds from issuance of Company stock related to employees exercising stock options. The net cash used by financing activities of$19.3 million in 2020 consisted primarily of$20.7 million used to purchase Company stock and dividend payments of$1.7 million , partially offset by$3.0 million proceeds from issuance of Company stock related to employees exercising stock options. The net cash used by financing activities of$1.1 million in 2019 consisted primarily of$1.7 million in dividend payments, offset by$0.6 million proceeds from issuance of Company stock related to employees exercising stock options. The new service center opened in mid-May and is fully operational today. The repurposing of our vacated distribution center to expand manufacturing capacity and extend our market reach will be completed in the second quarter of 2022. The incremental investments announced inJuly 2021 continue in earnest, focused on broadening our position as a low-cost manufacturer in the sector and increasing manufacturing capacity to drive growth. Capital spending in 2022 through 2024 will expand vertical integration in our manufacturing processes to reduce costs as well as modernize select wire manufacturing facilities to increase capacity and efficiency. Total capital expenditures were$118 million in 2021. We expect total capital expenditures to range from$150 -$170 million in 2022,$150 -$170 million in 2023, and$80 -$100 million in 2024. We expect to continue to fund these investments with existing cash reserves and operating cash flows.
As of
Critical Accounting Policies and Estimates
Management's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See Note 1 to the Financial Statements included under "Item 8. Financial Statements and Supplementary Data" of this annual report. Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its financial statements. Inventories are stated at the lower of cost, using the LIFO method, or market. The Company maintains two inventory pools for LIFO purposes. As permitted byU.S. generally accepted accounting principles, the Company maintains its inventory costs and cost of goods sold on a first-in, first-out (FIFO) basis and makes a monthly adjustment to adjust total inventory and cost of goods sold from FIFO to LIFO. The Company applies the LCM test by comparing the LIFO cost of its raw materials, work-in-process and finished goods inventories to estimated market values, which are based primarily upon the most recent quoted market price of copper and other raw materials and finished wire prices as of the end of each reporting period. The Company performs an LCM calculation quarterly. As ofDecember 31, 2021 , no LCM adjustment was required. However, decreases in copper and other material prices could necessitate establishing an LCM reserve in future periods. Additionally, future 17 -------------------------------------------------------------------------------- reductions in the quantity of inventory on hand could cause copper or other raw materials that are carried in inventory at costs different from the cost of copper and other raw materials in the period in which the reduction occurs to be included in costs of goods sold for that period at the different price. Revenue from the sale of the Company's products is recognized when goods are shipped to the customer, title and risk of loss are transferred, pricing is fixed or determinable and collection is reasonably assured. A provision for payment discounts and customer rebates is estimated based upon historical experience and other relevant factors and is recorded within the same period that the revenue is recognized. The Company has provided an allowance for credit losses on customer receivables based upon estimates of those customers' inability to make required payments. Such allowance is established and adjusted based upon the makeup of the current receivable portfolio, past bad debt experience and current market conditions. If the financial condition of our customers was to deteriorate and impair their ability to make payments to the Company, additional allowances for losses might be required in future periods.
Recent Accounting Pronouncements
TheFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") is the sole source of authoritativeU.S. GAAP, along with theSecurities and Exchange Commission ("SEC") andPublic Company Accounting Oversight Board ("PCAOB") issued rules and regulations that apply only toSEC registrants. The FASB issues an Accounting Standard Update ("ASU") to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. The following are those ASUs that are relevant to the Company. InDecember 2019 , the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. This ASU is effective for annual reporting periods beginning afterDecember 15, 2020 , and interim periods within those reporting periods. We adopted this new standard effectiveJanuary 1, 2021 , and it has had no material impact on the Company's financial statements or disclosures.
Information Regarding Forward-Looking Statements
This report contains various forward-looking statements and information that are based on management's belief as well as assumptions made by and information currently available to management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected.
Among the key factors that may have a direct bearing on the Company's operating results and stock price are:
•fluctuations in the global and national economy;
•the impact of a global pandemic;
•fluctuations in the level of activity in the construction industry, including remodeling;
•demand for the Company's products;
•the impact of price competition on the Company's margins;
•fluctuations in the price of copper, aluminum and other key raw materials;
•the loss of key manufacturers' representatives who sell the Company's product line;
•fluctuations in utility costs, especially electricity and natural gas, and freight costs;
•fluctuations in insurance costs and the availability of coverage of various types;
•weather related disasters at the Company's and/or key vendor's operating facilities;
•stock price fluctuations due to "stock market expectations" and other external variables;
•unforeseen future legal issues and/or government regulatory changes;
18
--------------------------------------------------------------------------------•changes in tax laws;
•patent and intellectual property disputes; and
•fluctuations in the Company's financial position or national banking issues that impede the Company's ability to obtain reasonable and adequate financing.
This list highlights some of the major factors that could affect the Company's operations or stock price, but cannot enumerate all the potential issues that management faces on a daily basis, many of which are totally out of management's control. For further discussion of the factors described herein and their potential effects on the Company, see "Item 1. Business," "Item 1A. Risk Factors," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
© Edgar Online, source
